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A Dynamic, General Equilibrium Analysis of Deviations From the Laws of One Price

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  • Beverly J. Lapham

Abstract

There are at least two versions of the Law of One Price under the assumptions of perfect competition, no trade barriers, and no transport costs. One version predicts equal prices of competing goods sold in the same country and manufactured by producers located in different countries. Another version predicts equal prices of a good manufactured by a single producer and sold in different countries when prices are converted to a common currency. Empirical studies suggest persistent, time-varying deviations from both versions of the Law of One Price. This paper explores a stochastic, dynamic, general equilibrium theoretical economy with explicitly strategic price setting behavior. The equilibrium processes generated by the economy exhibit properties which are generally consistent with persistent, time-varying deviations from the Laws of One Price.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_793.pdf
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Paper provided by Queen's University, Department of Economics in its series Working Papers with number 793.

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Date of creation: Sep 1990
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Handle: RePEc:qed:wpaper:793

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  1. A. Protopapadakis, Aris & R. Stoll, Hans, 1986. "The Law of One Price in international commodity markets: A reformulation and some formal tests," Journal of International Money and Finance, Elsevier, vol. 5(3), pages 335-360, September.
  2. Irving B. Kravis & Robert E. Lipsey, 1977. "Price Behavior in the Light of Balance of Payments Theories," NBER Working Papers 0181, National Bureau of Economic Research, Inc.
  3. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  4. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  5. Knetter, Michael M, 1989. "Price Discrimination by U.S. and German Exporters," American Economic Review, American Economic Association, vol. 79(1), pages 198-210, March.
  6. Irving B. Kravis & Robert E. Lipsey, 1975. "International Trade Prices and Price Proxies," NBER Chapters, in: The Role of the Computer in Economic and Social Research in Latin America, pages 253-268 National Bureau of Economic Research, Inc.
  7. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-24, January.
  8. Lapham, Beverly & Ware, Roger, 1994. "Markov puppy dogs and related animals," International Journal of Industrial Organization, Elsevier, vol. 12(4), pages 569-593, December.
  9. Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
  10. Aris Protopapadakis & Hans R. Stoll, . "Spot and Futures Prices and the Law of One Price," Rodney L. White Center for Financial Research Working Papers 17-82, Wharton School Rodney L. White Center for Financial Research.
  11. Gregory, Allan W & Smith, Gregor W, 1991. "Calibration as Testing: Inference in Simulated Macroeconomic Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 9(3), pages 297-303, July.
  12. Marston, Richard C., 1990. "Pricing to market in Japanese manufacturing," Journal of International Economics, Elsevier, vol. 29(3-4), pages 217-236, November.
  13. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
  14. Froot, Kenneth A & Klemperer, Paul D, 1989. "Exchange Rate Pass-Through When Market Share Matters," American Economic Review, American Economic Association, vol. 79(4), pages 637-54, September.
  15. Kravis, Irving B & Lipsey, Robert E, 1977. "Export Prices and the Transmission of Inflation," American Economic Review, American Economic Association, vol. 67(1), pages 155-63, February.
  16. Akerlof, George A & Yellen, Janet L, 1985. "Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?," American Economic Review, American Economic Association, vol. 75(4), pages 708-20, September.
  17. Giovannini, Alberto, 1988. "Exchange rates and traded goods prices," Journal of International Economics, Elsevier, vol. 24(1-2), pages 45-68, February.
  18. Driskill, Robert A. & McCafferty, Stephen, 1989. "Dynamic duopoly with adjustment costs: A differential game approach," Journal of Economic Theory, Elsevier, vol. 49(2), pages 324-338, December.
  19. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-33, March.
  20. Tsutsui, Shunichi & Mino, Kazuo, 1990. "Nonlinear strategies in dynamic duopolistic competition with sticky prices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 136-161, October.
  21. Reynolds, Stanley S, 1987. "Capacity Investment, Preemption and Commitment in an Infinite Horizon Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(1), pages 69-88, February.
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